Uniting capital markets before and after a crisis
Oliver Schimek, CEO of CrossLend, shares his insights on how building an efficient and transparent platform to boost cross-border investment may hold solutions for the uncertainty of Europe’s economy. How are fintech companies poised to truly unite the capital markets of Europe, while alleviating the fear banks have of uncertainty and supporting businesses who need loans? What challenges in uniting the Capital Markets of Europe remain the same regardless of the crisis? What problems was CrossLend trying to solve when it was founded, and how are the solutions it has developed especially relevant now? The CrossLend CEO is the appropriate man to answer all of these questions.
Oliver Schimek: “Think of Europe’s lending landscape as the backbone or bloodstream of the economy. The healthiness of these veins is crucial for the prosperity of the overall economy. While we started the company as a peer-to-peer lending company with the idea of providing funding flows ourselves, shortly after inception we have seen that the true value of our technologies can be leveraged by partnering with banks and through other B-to-B partnerships.”
“In the end we want to enable the various market participants like marketplace lenders, banks, insurance companies, pension funds and debt funds to seamlessly interact and be more profitable. For banks this means a digital almost real-time portfolio/balance sheet management. Especially on the asset distribution side, processes are still highly manual in today’s banks. Another blocker almost always is the availability of data.”
“We are far away from a world where each single asset is valued with regards to where in the bank it creates the most value or if it would be beneficial to sell that asset granularly. Yet, everyone speaks about originate to distribute. There is a gap of abilities that needs to be closed as soon as possible.”
“As a consequence of missing digitisation on the backend systems, banks today are stuck between regulatory pressure and innovation blockers. Capital markets realise that bank revenues are largely proportional to their equity via interest income while the proportionality factor is fully determined by Basel frameworks. The only variable in terms of profitability is cutting costs. Capital markets also realise that the ability of banks to escape the tightening grip of increasing equity requirements is insignificant. Valuations around or below 1x of annual revenue are the consequence while scandals and financial crises have shown that the risks for shareholders are still relatively high. This puts banks who are listed into a tricky competitive position with other companies at the capital markets. Non-listed banks share the same problems but the impacts might be more hidden in a confined space.”
“Of course the requirements for the stability of a bank are high. And therefore, certain limitations will always prevent banks from being perceived as Tesla-like tech companies. However, an environment where capital markets’ perception for banks remains negative, will also not result in a long-term sustainable banking ecosystem that supports economic prosperity in Europe. A backlog of digitisation or “technical debt” as we call it can be absorbed for a long time without leaving visible impacts – a bit like arteriosclerosis. The consequences will hit suddenly and in cascades.”
“To cut a long story short: we have identified the backlog of digitisation in banks as a core blocker for modern balance-sheet management. While we have built a well-functioning cross-border settlement structure at low costs for debt which is being actively used by marketplaces and FinTech originators, we are now focusing more and more to enable also banks to participate in such a marketplace and industrialise their asset distribution.”
Now you're rolling out and scaling your digital debt marketplace across multiple new countries and asset classes and you’re working to create a secondary market which, together with its primary market, will further strengthen its efforts to make the Capital Markets Union a reality. Why is it important to “make the Capital Markets Union a reality” and what are the possible barriers to overcome?
“The secondary market is a logical expansion of the primary market. The settlement of the loans is the same, however, the required data technology is different. For a secondary market we need to provide technology around real-time valuation of loans based on expected cashflow models. The applications exceed simple balance-sheet management, because trading a loan along the lifetime allows to use the seasoning effects of the loan as a way of “tranching” the risk along time.”
“Going one step back, a secondary market is just another requirement for the Capital Markets Union (CMU). This project we heard so much about over the last years is nothing else but a piece of European infrastructure. It is highways between financial institutions.”
“A lot of initiatives and thoughts have gone into the CMU over the last years. We have seen legislation changes, studies, think tanks and other action. The true blocker for a well-functioning CMU has been overlooked for a long time: it is the backlog of digitisation in banks.”
“Most banks today would have financial data warehouses to provide reporting-relevant data and de-silo regulatory, risk and finance. And while these allow to fulfil reporting requirements and have a consolidated view on the balance, portfolio-relevant data which would be required to actively participate in a vivid marketplace often times does not find the way from the frontend systems (e.g. credit management) into a similarly accessible structure. As a consequence, running a portfolio report can take significant time as data is hidden across multiple systems.”
“This is again where CrossLend can help with its infrastructure. What is required to make a bank part of the CMU is a kind of “debt operating system”. Think of it as a piece of middleware that connects to the relevant data bases and collects all relevant information on an asset level without human intervention. Based on this layer multiple applications can be implemented in a straightforward way. Examples can be an industrialized originate to distribute framework or internal asset mobilisation.”
“Regardless of what transaction you think of, three steps are necessary: 1. Data needs to be made available, 2. Data needs to be analysed and a decision needs to be made, 3. The transaction needs to be settled. Often, step 1 is the trickiest one.”
“It is part of CrossLend’s offering to provide the necessary technology. Whether the goal is to provide more oversight over the portfolio or actively engaging in the marketplace does not matter, the groundwork on the data side is crucial.”
Germany’s financial regulator BaFin has authorised CrossLend to provide financial services in the form of investment brokerage. What does this mean for CrossLend’s competitive edge and what are the implications and benefits for the German (and European) financial landscape?
“We’ve been fortunate enough to have both regulatory and financial backing to support our mission and competitive edge. We’re backed by Santander InnoVentures, Lakestar, ABN AMRO Ventures, Earlybird and others. Our total funding reached €49M in 2019, and the authorisation by BaFin further demonstrated the industry’s confidence in our service. Our aim is to contribute to a pan-European economic movement where liquidity can flow where it is needed – ultimately to Europe’s real economy. The support of key regulators in the market is essential in order to achieve this.”
About CrossLend
CrossLend is a FinTech, authorised by BaFin and CSSF, which has developed a European digital debt marketplace. On the marketplace, assets are transformed into securities or other investable formats. Originators such as banks, savings banks, cooperative banks, special credit institutions and FinTech credit platforms from Europe offer their assets to European institutional investors for purchase via the marketplace. The advantage of the CrossLend marketplace is the standardised and well-structured and transparent presentation of the originators’ credit data. This makes it easy for investors such as other banks, insurance companies, investment companies, pension funds and pension schemes to identify and compare loans according to their criteria. Since CrossLend brings together originators and investors from all over Europe on a central platform, CrossLend actively contributes to the European Capital Markets Union. CrossLend was founded in Berlin in 2014 and employs more than 70 people from over 30 countries. In addition to its headquarters in Berlin, CrossLend has offices in Frankfurt, Vienna, Luxembourg and London.
Oliver Schimek
Oliver Schimek is the CEO of CrossLend, the digital debt marketplace, and previously served as the CIO of Kreditech Holding SSL GmbH until June 2014. Mr Schimek is an entrepreneurial-minded physicist, who studied financial modelling for five years and founded Quantea, an algorithm-based trading strategy for FX-markets.